Politics

Labour's pointed stick

February 06, 2014
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Yesterday, the Institute for Fiscal Studies issued its Green Budget. Its name suggests otherwise, but this document has nothing to do with environmentalism. Instead it is a piece-by-piece analysis of the British economy.

The coruscating thoroughness of the Institute’s work was reflected in the turnout for the launch event. It took place in the same room in which Ed Miliband recently announced his bank reform policies. The IFS pulled in an even larger crowd than the possible next PM.

And the report’s findings? That the Government his barely half way through its intended programme of fiscal tightening—or "cuts". More fiscal strain is on the way. The Chancellor looks set to cut more than 30 per cent of “unprotected service budgets.” In addition, the government has made £6bn of spending commitments after 2015-16, which implies that further cuts will be necessary.

The pyramidal structure of the UK tax base was also made clear by the IFS. In 1979, the top 1 per cent of tax-payers in Britain paid 11 per cent of income tax. By 2011-12, that figure had risen to 27.5 per cent. The Institute was concerned by this excessive reliance on such a small group. The compendious report also covered the housing market—no bubble—pensions, energy prices, the global economy and more.

But politically, perhaps the most significant judgement came on p126, in the section setting out the Institute’s analysis of the squeeze on incomes. There it states that: “there is little reason to expect a strong recovery in living standards over the next few years.” The report continues: “According to the Office for Budget Responsibility, real earnings are not expected to return to their 2009-10 levels until 2018-19.”

The government will certainly welcome the judgement on the housing market. No 10 is very keen to downplay any suggestion that prices are overheating, especially in London (although the IFS does include the caveat that “the likelihood of a bubble is greatest there.") But the suggestion that living standards will not improve until long after the election will alarm for the Government.

The report goes on to say that “falling real earnings were the most important explanation for the falls in living standards,” which in turn leads to the question of whether the government can do anything to affect stagnating wage growth before the election. The implicit IFS judgment is that no, it cannot.

Inflation, rising energy prices, the export of middle ranking jobs to cheaper overseas economies, the use of automated systems in the workplace, the recession, the after-effects of a 30-year asset price boom—all of these elements are exerting a downward pressure on living standards and pay.

The Government has engineered a growth recovery of such vigour, that is has wrong-footed the sceptics, including the Labour party. But what the IFS’s report makes clear is that, in the run up to the election, Labour will have one remaining weapon with which to attack the government’s economic policies—and it is a sharp one.

A recovery may be under way. But what the IFS report strongly suggests is that the majority are not involved.